Balance transfers and your credit score
How does applying for a balance-transfer card affect your credit rating?
About two weeks ago, I signed up for Equifax's free trial of Score Watch. With Score Watch, you get your three credit reports and your FICO credit score as reported by Equifax for free for 30 days (you do need to cancel the service before Day 30 to avoid paying for the Score Watch service). I had recently signed up for MyFICO's free credit score program, and I wanted to compare the two.
One thing I immediately noticed was just how many credit cards I have. Only one has a balance, which is from a 0% APR on balance transfers offer I took advantage of last December. But the reason I have so many cards is because of the many balance-transfer deals I've used over the years. And that got me to wondering whether applying for a balance-transfer offer will hurt your credit score.
It seemed to me that applying for any credit card would lower your credit score, at least initially. Credit card companies pull an applicant's credit history, and such inquiries are a negative factor tending to lower a FICO score. A card issuer may not pull your credit history from each of the three major credit bureaus, so the negative impact on a credit score may occur with only one of the agencies. On the other hand, I recently applied for a Capital One business credit card, and Cap One pulled my credit from all three.
And with balance-transfer offers, there is one more factor that could result in a lower score -- high balances. When we get a balance-transfer card, we typically max out the credit limit on the transfer. This makes sense as we want to take full advantage of the 0% introductory offer. But maxing out on a card is also a negative factor when calculating a credit score. As the card is paid down, the extra available credit may in the long run actually improve your credit score, but in the short run, it would seem to lower your score. On a positive note, if we were using the new card to transfer other credit card debt, our total debt would not increase.
But the big question for me was whether there's a way to predict just how much a new balance-transfer credit card would affect my credit score. It turns out there is, and the results really surprised me. Both MyFICO and Equifax offer a credit score simulator. These tools allow you to predict what your future credit score will be if you take certain actions such as maxing out or paying off your credit cards, applying for a mortgage, or getting a car loan. One of the simulations offered is what impact applying for a balance-transfer offer will have on your score.
My current credit card debt is about $20,000. It's that high because I took advantage of a 0% balance-transfer offer last December that had no balance-transfer fee (the offer is no longer available) and transferred about $20,000 from my home-equity line of credit that I had used for a home renovation project. I entered that into both the MyFICO and Equifax simulators. Keep in mind that my FICO score is slightly different with each, largely having to do with the timing of when I pulled my last score report from each source. Anyway, here are the results of the simulation:
- Equifax: My current score of 749 would change to a score somewhere in the range of 734 to 764.
- MyFICO: My current score of 768 would change to a score somewhere in the range of 763 to 803.
I was surprised to see that the worst-case scenario was a loss of just a few points. Of course, the effect of applying for a new balance-transfer offer will certainly vary from one person to the next, as both MyFICO and Equifax make clear. From MyFICO:
Bottom line: The effects of credit card balance transfers are unique for each individual. This is because there are many factors to consider, including the terms of the transfer as well as other relevant information on your credit profile.
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